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Firm diversi\u85cation across unrelated businesses is prevalent in many emerging economies, in contrast to the practices in developed economies. A fundamental di¤erence between these two types of economies concerns with the existence of sound economic institutions including in particular the institutions constraining government expropriation of private properties. In this paper, using a survey data set of private enterprises in China, we \u85nd that severer government expropriation in the form of higher informal levies, extralegal payments, and entertainment fees causes rms to diversify. We then provide two case studies to highlight the extra costs that Chinas private entrepreneurs need to bear for doing businesses, and how they can subsequently leverage their relations with government bureaucrats to diversify into various businesses